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SBV’s Governor: “I have been bearing big pressure”

The Governor of the State Bank of Vietnam, Nguyen Van Giau, talked about the issues relating to the interest rate policy in 2009, about liquidity and the exchange rate.

Governor of the State Bank of Vietnam Nguyen Van Giau

In the first half of 2008, the cooking and oil prices skyrocketed; the CPI soared, while the stock and real estate prices plunged. However, in the second half, the oil price dropped from the record high at US $147 a barrel in mid-July to below US $40 a barrel in mid-December. The food prices have been decreasing, while unemployment has been increasing, showing the signs of deflation.

As such, the world’s economy now tends to shift from high inflation to deflation associated by the global economic recession.

We think that the crisis will even be worse this year.

The biggest struggle is that Vietnam’s economy has had to bear bad impacts from the outside and struggle with inner difficulties as well: high inflation, record trade deficit and stock market’s falls.

I can say that 2008 was the year when Vietnam’s banking had to deal with the biggest difficulties ever in the last twenty years of renovation.

Some experts attributed the high inflation in the last year to the loosened monetary policies which had been applied for years. What is your viewpoint about that?

In previous years, we strived to have high economic growth and in order to do that we needed to apply loosened monetary policies.

From 2003-2007, in some countries, the credit growth rate was just 0.66 times higher than GDP growth rate. In Singapore and Thailand, the ratio was 1/1 (if the GDP growth rate is 7%, the credit growth rate is 7% too).

Meanwhile in Vietnam, just within four years, from 2003 to 2006, the ratio was 3.85, and it was 6.3 in 2007.

At the end of May 2007, there were signs of inflation, which forced the central bank to require the double compulsory reserve ratio on deposits from 5% to 10%.

On May 28, 2007, the State Bank of Vietnam released the decision, setting limit on loaning to securities investors, while controlling the real estate loaning.

In October 2007, the inflation increased by 0.74%.

In November and December 2007, the petrol price and employees’ basic salaries were raised which made the inflation increase.

What were the next moves taken by the State Bank?

In the first half of 2008, in order to deal with the high inflation, the state bank had to tighten the monetary policies. A lot of measures were undertaken to withdraw cash from circulation which has helped curb the inflation.

However, currently, the economic growth is now under the risks of slowing down, and the central bank need to loosen the monetary policies to push up production and business.

In 2008, the exchange rate went up and down all the time, which sometimes caused disorder to the market. What is your explanation for this?

In principle, in order to keep the exchange rate stabilized, we need to keep supply and demand in balance, while this still depends on a lot of other factors like trade balance, capital balance, such as foreign direct investment, foreign portfolio investment, and Government’s debt, current accounts and others.

I had a working session with IMF South East Asia Director, who affirmed that the exchange rate policy is designed based on the market’s supply and demand with flexible adjustment that Vietnam is pursuing proves to be the right policy.

Meanwhile, ADB President told me that Vietnam is lucky as it can control the exchange rate, otherwise, the path to control the high inflation would have been longer.

The president said that with the exchange rate regulation method followed by the central bank, the positive result would be seen in November 2008. However, in fact, the positive results have come sooner than expected.

I also have to reveal that we had experienced an unceasingly struggle to keep the exchange rate stabilized, as there were many negative factors. The trade deficit in January, February and then March of 2008 galloped.

In 1999-2001, the trade deficit was just at US $1 billion, and the figure was US $5 billion in 2002-2006. Meanwhile, it jumped to US $14 billion per annum in 2007.

Some experts criticized the State bank for refusing pumping capital to commercial banks when they got difficulties in liquidity in Q2 2008. What would you say about that?

At that time, the task of the State Bank of Vietnam was to withdraw cash from circulation to curb inflation. Therefore, my fellow-workers and I had to stay patient at that moment. We bore hard pressure from the public and commercial banks.

However, the result is good. The State Bank successfully withdrew VND 37 trillion from circulation and the result that has been highly appreciated by the foreign financial circle.